Economic policy uncertainty and the UK demand for money: evidence from the inter-war period

Abstract

PurposeThis paper empirically investigates the effect of economic policy uncertainty (EPU) on the UK money demand stability during the inter-war period (1920–1938). Both a narrow definition (M0) and a broad definition (M3) of money are investigated.Design/methodology/approachThe empirical investigation is conducted by employing the autoregressive distributed lag (ARDL) bounds testing approach to cointegration.FindingsResults presented indicate a stable demand for both definitions of money only when EPU is included as one of the determinants of demand function. The EPU imposes a negative effect on the demand for both definitions of money. The causality test results further indicate long- and short-term causality from the determinants (including EPU) to both forms of money demand.Practical implicationsSignificant presence of the economic uncertainty weakens the effects of the monetary policy on the economy.Originality/valueThis is a historical economics paper. Given the turmoil and uncertainty associated with the inter-war period, an empirical investigation of UK money demand is an interesting exercise. This is the first such paper.